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Budget 2013

By March 21, 2013February 12th, 2019No Comments


To say that George Osborne faced a difficult task when he stood up to deliver his Budget speech on 20th March was one of the year’s major understatements. Both economically and politically, the backdrop to his Budget was bleak, particularly with an increase of 48,000 in youth unemployment announced barely three hours before he stood up to speak.

Osborne appeared in a bullish mood though, taking to Twitter for the first time to state: Today I’ll present a Budget that tackles the economy’s problems head on helping those who want to work hard and get on.

The Economic Background to the Budget

Three months prior to the Budget, the Office for Budget Responsibility (OBR) slashed its growth forecasts, predicting that growth for the four years from 2012 would be half a percentage point lower than had previously been forecast.

At the time, the OBR was not predicting a ‘triple-dip’ recession but data released just before the Budget pointed to a slump in the manufacturing industry: this sent the Pound tumbling and raised the grim spectre of the ‘triple-dip’, something that would surely seal the political fate of the Chancellor.

With continuing problems in Europe, as Cyprus rejected the terms of an EU bailout and with North Korea rumoured to have launched a cyber-attack on South Korea broadcasters and banks, neither Britain nor the wider world was a happy place on the morning of 20th March.

The Political Background

Politically, the outlook for the Chancellor was even less promising. According to a poll in the Guardian, only 1 in 5 British people continued to support his austerity measures and voices in industry were increasingly calling for the purse strings to be loosened.

The Conservative party were trailing Labour by a wide margin in the opinion polls and backbench Tory MPs – many of whom have long been unimpressed by the Chancellor – openly warned that the Budget was his last chance to exert some authority and appear credible.

The Chancellor also received a vote of no confidence much closer to home, with AstraZeneca choosing the day before the Budget to announce that they were cutting 700 jobs in the Chancellor’s Tatton constituency. This announcement came just five months after he had helped the drugs group secure a £5m grant to develop its research and development centre in the constituency.

So, as George Osborne took a sip of water and rose to his feet to deliver his speech, the only thing certain was that he wouldn’t be able to please everybody. Moreover, the question was, could he please anybody?

George Osborne’s General Comments

“It’s not going to be easy but we’re on the right path”, was a simple summary of the Chancellor’s remarks before he got down to the substantive details of his Budget. In particular, he emphasised that the Coalition Government was doing the “exact opposite” of the previous administration – which had resulted in Government spending, as a proportion of the national income, falling from 47.4% to 43.6%.

Growth was forecast to be 0.6% in 2013, rising gradually to 2.8% in 2017. Despite the poor figures on unemployment announced earlier in the morning, George Osborne proudly proclaimed that for every one job lost in the public sector, six were being created in the private sector.

It was, he said, a Budget for an “aspiration nation.” And you can expect to hear that phrase repeated many times in the run-up to the next General Election…

The public finances

In his Autumn Statement, George Osborne claimed that borrowing was “on course” to fall for every year in this parliament. It was a claim he couldn’t repeat as weak tax revenues and problems in the wider global economy continued to blow the Government off course. Despite the £28bn of savings pushed through in 2012, borrowing is now expected to be about £8bn higher than last year.

Public debt rose to about £1tn last year and is expected to reach £1.3tn by 2014. It has been over a decade since there was a fall in public debt and the OBR forecast is expected to show it rising relentlessly to almost £1.6tn by 2018.

The Budget deficit is forecast to be 7.4% of GDP in the current year, and then to fall gradually until it reaches 2.2% in 2017/18. Inevitably, those figures are higher than the forecast in the Autumn Statement for the reasons outlined above. The Budget deficit for 2009/10 was 11.2% of GDP, allowing the Chancellor to claim that he had reduced it by a third since coming into office.

In the circumstances, the Budget was always going to be fiscally neutral – that is, every penny given away would be clawed back somewhere else.

Getting the economy moving

George Osborne would no doubt argue that the whole of the Budget could be classed as ‘getting the economy moving’ and the measures on Corporation Tax and the new Employment Allowance would certainly fall under this heading.

The Bank of England kept its 2% inflation target but was given an updated remit to allow it to use “unconventional monetary instruments” to support the economy, whilst keeping inflation stable. Presumably, this means allowing the Bank to buy slightly riskier assets if there is a further round of Quantitative Easing.

Additional measures were:

What An additional £3bn per year investment in infrastructure
When From 2015
Comments This move had been widely trailed, and is expected to be funded by departmental budget savings in Whitehall.

“By investing in the economic arteries of the country we will get growth flowing to every part of it,” announced the Chancellor.

Roads, railways and power stations will be particularly targeted and the BBC’s business editor, Robert Peston, described the announcement as “very significant.” The budgets for schools and the NHS are protected from the sought-for savings.


What Help for people wanting to buy their own home
When From 2014
Comments Few people were anticipating the scope of the ‘Help to Buy’ scheme announced by the Chancellor, which tackled the much higher deposits now needed to buy a house.

The Government will make £3.5bn available for the scheme and will give a 20% shared equity loan to anyone buying a newly built home, providing they can fund a 5% deposit themselves. The loan will be interest free for the first five years.

In addition, there will be Government mortgage guarantees to anyone buying a home (newly built or not) in a move which George Osborne described as a “dramatic intervention to get our housing market moving.” There will be £130bn of Government funds available to guarantee high street mortgages.


Tax and spending

What An increase in the personal tax allowance from £9,440 to £10,000
When From April 2014
Comments Moving to a personal tax allowance of £10,000 was a central plank of the Liberal Democrat manifesto and it was always the intention that it should be introduced by the end of the current parliament. However, the Chancellor has now brought the measure forward to April 2014.


What The flat rate pension of £144 per week is to be introduced earlier than originally planned
When From 2016
Comments Clearly this is good news for most pensioners, and will particularly favour women who have devoted a large part of their working life to looking after children, as well as the self-employed.


What The cap on social care costs is to be introduced
When In 2016
Comments This move follows the report produced by Andrew Dilnot, with the costs of social care now being capped at £72,000 and the threshold on means tested benefits being raised from £23,000 to £118,000.


What Introduction of a new Tax-Free Childcare Scheme for working families
When As soon as the legislation is passed
Comments Tax free childcare vouchers worth £1,200 per child will be introduced. This move received mixed reviews, one critic deriding it as “childcare worked out on the back of an envelope.” Nevertheless, the childcare vouchers will be introduced and there will also be increased support for families with children on universal credit.


Fuel and spending taxes

What The increase of 3p per litre in Fuel Duty, planned for September, is to be scrapped
When Immediately
Comments With oil prices close to $110 a barrel and rural Tory constituencies making their views very evident, this was a widely expected move.

There will now be no increase in the duty on unleaded or diesel petrol until at least September 2014. The deferral is likely to cost the Treasury £1.6bn in lost revenue but was unsurprisingly hailed as “great news” by the motoring organisations.

With a General Election now on the horizon, there must be every chance that there will be no increases in Fuel Duty throughout this parliament.


What Taxes on alcohol will rise, with the exception of beer. Cigarette duty will be unchanged
When From midnight on Sunday
Comments The planned increase of 6p on a pint of beer was always likely to be scrapped and many people anticipated the end of the ‘beer duty escalator.’

However, the Chancellor went one step further, reducing the price of a pint by 1p. He said he was “much impressed” by the arguments put forward by the MP for Burton-on-Trent. Cigarette duty will be unchanged – it will continue to rise by inflation plus 5%.


Business taxes

What Corporation Tax is to be reduced to 20%
When From April 2015
Comments With Corporation tax having been reduced from 28% to 21%, a symbolic cut to 20% was always on the cards.

The move will cost about £500m and is bound to be welcomed by businesses. Significantly, it will give Britain the lowest business tax rate in the Western world, well below the 29% in Germany or the 40% in the USA and even lower than that in Luxembourg.

To no-one’s surprise, the Chancellor proudly announced that Britain was “open for business.” The lower rate will be funded by a rise in the banking levy to 0.142%.


What One third of small firms are to pay no employers national insurance contributions
When From April 2014
Comments George Osborne described this as “the biggest tax cut in the Budget.”

Citing the cost of employers’ national insurance contributions as one of the biggest barriers to taking on new staff, the Chancellor said that the ending of contracting out would bring extra revenue to the Government which he proposed to use to create an ‘Employment Allowance.’

He stated that it would be worth £2,000 to every business in the country £ a move that will be welcomed by SMEs. Charities and sports clubs will also benefit from the move.


Other measures

What A new General Anti-Avoidance Rule will come into effect
When As soon as the legislation is passed
Comments GAAR has been roundly mocked by tax protesters who claim it will have no impact at all on companies like Starbucks and Amazon for whom, they say, “tax is a matter of choice.”

The Chancellor would argue that the reduction in Corporation tax to 20% will go some way to countering this and he also highlighted further co-operation with the tax authorities in the Isle of Man, Guernsey and Jersey to combat tax avoidance and evasion.

The moves are expected to bring in an additional £3bn of revenue.


What Avoidance of employment taxes
When TBC
Comments Consultation on measures to consider the taxation of limited liability partnerships (LLPs).


What 1% pay rise cap for public sector workers
When Extended to 2015/2016
Comments A move which was widely trailed but hardly likely to be popular and which will surely lead to some scathing comments from the Trades Unions.

The armed forces are exempt from the move, although the pay rise they are expected to receive in May is only 1.45% and is therefore still below the increase in the cost of living.


What A new tax regime to promote investment in Shale Gas
When As soon as it is passed by Parliament
Comments “Shale gas is part of the future”, said the Chancellor, a statement that not everyone agrees with but nevertheless, it appears to be part of the Government’s energy policy and they are keen to promote investment in it.


What Consultation to take place on transferring savings held in Child Trust Funds to Junior ISAs
When TBC
Comments A welcome move that if implemented would see a more consistent and flexible approach to child savings.


What Equitable Life ex-gratia payments of £5,000
When Expected from April 2014
Comments Some would argue that this is long overdue. The payments will be made to those policy holders who bought a with-profits annuity before September 1992.


What Tax collection consultation
When TBC
Comments The Government announced that it will enable HMRC to increase the amount of tax debt collected through PAYE.


The Chancellor’s Closing Remarks

After 57 minutes on his feet, George Osborne sat down. He had opened his speech by saying that he was going to “level with people” and by admitting that “it (the recovery) is taking longer than anyone hoped.”

The speech he delivered looked to have been generally well received by his own supporters and even some of the expected criticism was muted. As Europe lurches from crisis to crisis and the world economic outlook stubbornly refuses to improve, most people accept that the Chancellor’s room for manoeuvre is limited.

In his closing remarks, George Osborne claimed that the Government had secured some “major achievements in difficult times.” It was, he said, a Budget that confronted the UK’s problems but was one for a country determined to be “prosperous, solvent and free”. It was a Budget for an “aspiration nation.” There’s that phrase again…